V. 22:5 (58-61): Four Measures Of Market Volatility by Frederic Ruffy

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Four Measures Of Market Volatility by Frederic Ruffy

How do you read the CBOE’s new measures of volatility? Find
out here.

The CBOE volatility index (VIX) was last modified
in September 2003. The Chicago Board
Options Exchange (CBOE) reconstructed the
index ahead of a planned launch of options
and futures on the index. While the debut of these new options and futures products is expected in late
March 2004 (as of this writing in early March) pending
regulatory approval, the old VIX started appearing under the
symbol VXO, and the new formula began, continuing the ticker
symbol VIX.

Today, both indexes offer real-time information concerning
implied volatility in the options market. In addition,
traders can gauge volatility trends using two other relatively
new indexes — the Nasdaq 100 volatility index (VXN) and
the Nasdaq QQQ volatility index (QQV). In order to make
sense of all these volatility indexes, let’s take a look at what
they represent and what makes each one unique.

USING VOLATILITY

The CBOE launched the original VIX in 1993. Eleven years
later, much has changed in the options markets, and as a
result, the CBOE decided that it was tune-up time for the
volatility index. The most significant change is that, while the
old index was based on the implied volatility (IV) of Standard & Poor’s 100 index (OEX) options,
the new volatility index is
derived from the more actively
traded and liquid S&P 500 (SPX)
options contract.

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